The True Cost of DIY Investing: 3.52%

In all aspects of life, there are folks who believe that they can do things better and cheaper if they take the “Do-it-yourself” (DIY) approach. Sometimes you can save money; however, the longer I live, the more I embrace specialization of labor. Even if I can do certain tasks, hiring specialists usually means I have less stress and get a better end result. Investing is no different.

Starting in 1994, Dalbar began a study called the Quantitative Analysis of Investor Behavior (QAIB). This study basically examines the returns that the market delivered over a period of time versus the actual returns that investors earn. The difference in returns is attributable to people buying, selling, and switching funds; basically, they are making active bets on the stock market, and trying to guess where to allocate their assets.

Well, how do most DIY investors do? Terribly.

In almost every time period, DIY investors’ performance significantly lags that of the general market. The 2015 study was in line with other historical studies; over a 20 year time period (1995-2015) the average equity investor earned an annualized 4.67% return while the S&P 500 generated 8.19% annualized return. This 3.52% difference is often called the investor behavior penalty. It suggests that individuals often make poor investment decisions on their own. So, while hiring a professional to help manage your assets isn’t as cheap as the DIY approach, there is lots of evidence to suggest that investors may get higher net returns by hiring a professional to help them capture global equity returns in a more consistent and reliable fashion.